Hi All - So I understand the concept of equity financing in theory but I have a few questions I'm trying to get straight. I think the best way would be to offer some scenarios and to try to get answers.
Scenario 1:
So, let's say that I take my personal savings and use it to start a business (I imagine this is the way most start-ups begin at some point). I invest $10,000 of my own money and I would record $10,000 in shareholder's equity on my balance sheet - representing 100% of my company value. The company grows substantially, netting an amazing return on equity and the company book value is now $1,000,000. However, a substantial amount of the book value of the company is in fixed assets and low cash flow is hindering company growth so I decide to sell 25% of my company.
Here is my question: As 100% owner in the company, doesn't the sale of my 25% equity represent a liquidation of MY personal portion of the company and wouldn't those funds go to MY personal account and not the corporate/company account? To raise corporate funds via equity, would I sell my personal equity portion and then write myself a payable note?
Scenario 2:
This one is less complicated in my eyes. If 4 people start a company as equal partners, so each agreeing to a 25% ownership share, and the company generates $200,000 in profits, so each person has claim to $50,000 - how is the decision made as to the portion of profits reinvested in the company? Would this be something handled at the inception of the firm in some sort of company charter - like a majority vote dictates what is reinvested in the company versus paid to partners? On that note, lets say that the company was not profitable in its first few years and more capital was needed to keep it going. If one person was in a position to contribute and others were not, would the firm write that person a payable note or perhaps that person would "buy" equity from the other partners (but then this goes to scenario 1 as to whether the buyout of other partners generates cash for the firm or the other partner...)
Thanks all.
Scenario 1:
So, let's say that I take my personal savings and use it to start a business (I imagine this is the way most start-ups begin at some point). I invest $10,000 of my own money and I would record $10,000 in shareholder's equity on my balance sheet - representing 100% of my company value. The company grows substantially, netting an amazing return on equity and the company book value is now $1,000,000. However, a substantial amount of the book value of the company is in fixed assets and low cash flow is hindering company growth so I decide to sell 25% of my company.
Here is my question: As 100% owner in the company, doesn't the sale of my 25% equity represent a liquidation of MY personal portion of the company and wouldn't those funds go to MY personal account and not the corporate/company account? To raise corporate funds via equity, would I sell my personal equity portion and then write myself a payable note?
Scenario 2:
This one is less complicated in my eyes. If 4 people start a company as equal partners, so each agreeing to a 25% ownership share, and the company generates $200,000 in profits, so each person has claim to $50,000 - how is the decision made as to the portion of profits reinvested in the company? Would this be something handled at the inception of the firm in some sort of company charter - like a majority vote dictates what is reinvested in the company versus paid to partners? On that note, lets say that the company was not profitable in its first few years and more capital was needed to keep it going. If one person was in a position to contribute and others were not, would the firm write that person a payable note or perhaps that person would "buy" equity from the other partners (but then this goes to scenario 1 as to whether the buyout of other partners generates cash for the firm or the other partner...)
Thanks all.
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